Problem 5-29 Changes in Cost Structure; Break-Even Analysis; Operating Leverage; Margin of Safety [LO5-4, LO5-5, LO5-7, LO5-8]

Morton Company’s contribution format income statement for last month is given below:

The industry in which Morton Company operates is quite sensitive to cyclical movements in the economy. Thus, profits vary considerably from year to year according to general economic conditions. The company has a large amount of unused capacity and is studying ways of improving profits.

Required:

1. New equipment has come onto the market that would allow Morton Company to automate a portion of its operations. Variable expenses would be reduced by $8.70 per unit. However, fixed expenses would increase to a total of $767,340 each month. Prepare two contribution format income statements, one showing present operations and one showing how operations would appear if the new equipment is purchased.

2. Refer to the income statements in (1). For the present operations and the proposed new operations, compute (a) the degree of operating leverage, (b) the break-even point in dollar sales, and (c) the margin of safety in dollars and the margin of safety percentage.

3. Refer again to the data in (1). As a manager, what factor would be paramount in your mind in deciding whether to purchase the new equipment? (Assume that enough funds are available to make the purchase.)

4. Refer to the original data. Rather than purchase new equipment, the marketing manager argues that the company’s marketing strategy should be changed. Rather than pay sales commissions, which are currently included in variable expenses, the company would pay salespersons fixed salaries and would invest heavily in advertising. The marketing manager claims this new approach would increase unit sales by 30% without any change in selling price; the company’s new monthly fixed expenses would be $359,513; and its net operating income would increase by 20%. Compute the company's break-even point in dollar sales under the new marketing strategy.

1. Why is documentation, conclusion, and accumulation of audit evidence important for auditors to maintain?
2. Why are representation letters important confirmation for external auditors to use in their final evaluation of the audit?

You have just been hired as a financial analyst for Lydex Company, a manufacturer of safety helmets. Your boss has asked you to perform a comprehensive analysis of the company’s financial statements, including comparing Lydex’s performance to its major competitors. The company’s financial statements for the last two years are as follows:

To begin your assignment you gather the following financial data and ratios that are typical of companies in Lydex Company’s industry:

Required:

1. Present the balance sheet in common-size format.

2. Present the income statement in common-size format down through net income.

Required 1

Required 2

Problem 20-17 Integrating problem; error; depreciation; deferred taxes [LO20-6]

George Young Industries (GYI) acquired industrial robots at the beginning of 2015 and added them to the company’s assembly process. During 2018, management became aware that the $2.2 million cost of the machinery was inadvertently recorded as repair expense on GYI’s books and on its income tax return. The industrial robots have 10-year useful lives and no material salvage value. This class of equipment is depreciated by the straight-line method for financial reporting purposes and for tax purposes it is considered to be MACRS 7-year property. Cost deducted over 7 years by the modified accelerated recovery system as follows:

The tax rate is 40% for all years involved.

Required:
1. & 3. Prepare any journal entry necessary as a direct result of the error described and the adjusting entry for 2018 depreciation. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
  

Berger’s Lawn Maintenance Inc. is considering accepting 20-year property maintenance contract from the City of Kingston. The contract would require Berger’s to acquire new landscaping equipment, including a new trencher and excavator machine, amounting to a total purchase cost of $500,000 plus installation costs of $50,000. Other data relating to the contract are as follows: Annual incremental revenues from the contract $200,000 Annual maintenance cost for the new equipment $80,000 Additional maintenance costs at the end of year 10 $300,000 Salvage value of the equipment at termination of the contract $20,000 If the contract was accepted, several old, fully depreciated pieces of equipment would be sold at a total price of $30,000 upon signing the contract. These funds would be used to help purchase the new equipment. For tax purposes, the company computes CCA deductions using the maximum rate of 20%. The company requires an 11% after-tax return on all equipment purchases. The tax rate is 30%.

Required: Compute the net present value of this investment opportunity. Round all dollar amounts to the nearest whole dollar. Would you recommend that the contract be accepted?

1. A charter flight charges a fare of $200per person plus an additional $4 per person for each unsold seat on a plane that holds a maximum of 100 passengers. Let x represent the number of unsold seats.

a)Express the number of passengers on the flight as a function of x. Call this functionQ(x).

b)Express the price per ticket on the flight as a function of x. Call this functionP(x)

c)Express the total revenue received for the flight as a function of x. Call this functionR(x)

d)Find the number of unsold seats that will produce the maximum revenue as well as what the maximum revenue is (rounded to the nearest cent). Explain how you found your answer using complete sentence

Bonita Cole Inc. acquired the following assets in January of 2015. Equipment, estimated service life, 5 years; salvage value, $16,000 $559,000 Building, estimated service life, 30 years; no salvage value $675,000 The equipment has been depreciated using the sum-of-the-years’-digits method for the first 3 years for financial reporting purposes. In 2018, the company decided to change the method of computing depreciation to the straight-line method for the equipment, but no change was made in the estimated service life or salvage value. It was also decided to change the total estimated service life of the building from 30 years to 40 years, with no change in the estimated salvage value. The building is depreciated on the straight-line method. (a) Prepare the general journal entry to record depreciation expense for the equipment in 2018. (b) Prepare the journal entry to record depreciation expense for the building in 2018. (Round answers to 0 decimal places, e.g. 125. Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.) No. Account Titles and Explanation Debit Credit (a) (b)

discuss what a disclaimer is, when is it is issued, and how it would affect the format of a standard three paragraph audit report.

E8-10 (Algo) Computing Depreciation under Alternative Methods LO8-3

Strong Metals Inc. purchased a new stamping machine at the beginning of the year at a cost of $1,900,000. The estimated residual value was $100,000. Assume that the estimated useful life was five years and the estimated productive life of the machine was 300,000 units. Actual annual production was as follows:

Required:

1. Complete a separate depreciation schedule for each of the alternative methods.

a. Straight-line.

b. Units-of-production.

c. Double-declining-balance.

This is the chart to use for each question. Boxes with a dash in it do not have to be filled.

For the financial year ending 30 June 2019, MyBeauty LTd has entered into two independent transactions denominated in foreign currency as follows.

Transaction A

MyBeauty Ltd sells some goods on credit to Bristol Industries, a British company. The contract, dated 1 January 2019, is denominated in United Kingdom pounds and the contract amounts to £150,000. Bristol Industries settles the contract on 29 January 2019. 

The relevant exchange rates are as follows:

3 January 2019

A$1.00 = £0.5684

29 January 2019

A$1.00 = £0.5892

Transaction B

On 1 July 2017, MyBeauty Ltd entered into a loan denominated in Euros, borrowing €300,000 from a European Bank. The following summarises the bank loan statements over the period 1 July 2017 to 30 June 2019.

Date 

Details 

1 July 2017

Loan contract – principal

300,000

300,000 DR

30 June 2018

Interest

33,000

333,000 DR

30 June 2019

Interest

37,000

370,000 DR

The relevant exchange rates are as follows:

1 July 2017

A$1.00 = €0.6545

30 June 2018

A$1.00 = €0.6045

30 June 2019

A$1.00 = €0.6419

Required:

In accordance with AASB 121, prepare all relevant journal entries of MyBeauty Ltd to account for the above transactions for the financial years ending 30 June 2018 and 2019, where relevant.

The general ledger of the Karlin Company, a consulting company, at January 1, 2021, contained the following account balances:

The following is a summary of the transactions for the year:

1. Service revenue, $104,000, of which $31,200 was on account and the balance was received in cash.
2. Collected on accounts receivable, $22,300.
3. Issued shares of common stock in exchange for $8,000 in cash.
4. Paid salaries, $37,750 (of which $6,250 was for salaries payable at the end of the prior year).
5. Paid miscellaneous expense for various items, $20,400.
6. Purchased equipment for $10,500 in cash.
7. Paid $2,475 in cash dividends to shareholders.

1. Accrued salaries at year-end amounted to $755.
2. Depreciation for the year on the equipment is $1,600.

Required:

2., 5, & 8. Prepare the summary, adjusting and closing entries for each of the transactions listed.
3. Post the transactions, adjusting and closing entries into the appropriate t-accounts.
4. Prepare an unadjusted trial balance.
6. Prepare an adjusted trial balance.
7-a. Prepare an income statement for 2021.
7-b. Prepare a balance sheet as of December 31, 2021.
9. Prepare a post-closing trial balance.

"Elizabeth Egbert owns a galvanizing plant. Customers bring in their fabricated steel products (like light poles, towers, trailers, etc.), and Egbert dips them into a heated vat of molten zinc. The zinc bonds to the metal and produces a highly durable corrosion resistant product. " Egbert's primary inventory is molten zinc purchased from suppliers in large blocks of solid material. These blocks are immersed in the heated vat and will melt together with the zinc already in the pool. Egbert generally keeps the vat relatively full, and it is never allowed to cool. Egbert started the year 20X8 with 500,000 pounds of zinc in the pool. During the year Egbert purchased 2,800,000 pounds of zinc. At year's end, the pool contained 520,000 pounds of zinc.

Please answer A, C, E, F, G

(a) How much zinc was used during 20X8? (b) Accountants frequently refer to "goods available for sale." Is this concept the same as ending inventory? How much zinc, in pounds, was "available for sale?" (c) If the beginning inventory cost $1.25 per pound, and purchases during 20X8 cost $1.50 per pound, how much is the "cost of goods available for sale"? (e) If Egbert uses FIFO, how much should be attributed to ending inventory and how much to cost of goods sold? (f) If Egbert uses LIFO, how much should be attributed to ending inventory and how much to cost of goods sold? (g) What will be the difference in profitability between choosing the FIFO and LIFO methods? Does is seem reasonable the choice of accounting method can change the reported profit?

The City of St. Louis, Mississippi (population just under 24,000) passed a bond issue for $2,500,000, 4.5 percent, semiannual interest, 10 year bonds to finance the construction of a second high school to be called McGhee High, named in memory of the Pulitzer Prize winning author, William Faulkner. The State also contributed $110,000 for construction of the gymnasium. The contractor selected then submitted her contract for $2,080,000 to commence on January 2, 2019, with the project’s estimated completion in late 2019.

Part 1:

1. The contractor submitted her signed contract to the City of St. Louis. The entry to record the contract in the Debt Services Fund would include a:

A. Debit to Encumbrances—2019, $2,500,000.

B. Debit to Construction Work-in-Progress, $2,080,000.

C. Credit to Encumbrances—2019, $2,080,000.

D. Credit to Encumbrances Outstanding—2019, $2,080,000.

2. The money from the State of Mississippi of $110,000 was received by the City of St. Louis’ General Fund. The monies were then transferred from the General Fund to the Capital Project Fund. The entry in the General Fund receiving the grant money from the state would include a:

A. Credit to Program Revenues—Public Education—Capital Grants and Contributions, $110,000.

B. Credit to Revenues, $110,000.

C. Debit to Other Financing Uses—Transfers-out, $110,000.

D. Credit to Other Financing Uses—Transfers-in, $110,000.

3. The entry in the General Fund transferring the state monies to the Capital Projects Fund would include a:

A. Debit to Cash, $110,000.

B. Credit to Cash, $110,000.

C. Debit to Other Financing Sources, $110,000.

D. Credit to Other Financing Uses, $110,000

4. The entry in the Capital Projects Fund receiving the transferred state monies from the General Fund would include a:

A. Credit to Other Financing Sources, $110,000.

B. Debit to Other Financing Uses, $110,000.

C. Credit to Cash, $110,000.

D. Credit to Grants Receivable, $110,000

5. When the contractor submitted a $700,000 progress billing, the following entry in the Capital Projects Fund would include:

A. Debit to Encumbrances—2019, $700,000.

B. Credit to Cash, $700,000.

C. Debit to Encumbrances Outstanding—2019, $700,000.

D. Debit to Construction-work-in progress, $700,000

Part 2:

6. Assuming the partial billing was approved for payment and the expenditure and liability (contracts payable) was recorded for $700,000; however, St. Louis has a policy of not paying 100 percent, but retaining 20 percent as a retained percentage. The entry in the Capital Projects Fund to record the allowed payment and retained percentage would include:

A. Credit to Cash, $560,000.

B. Debit to Contracts Payable, $560,000.

C. Credit to Contracts Payable—Retained Percentage, $560,000.

D. Debit to Contracts Payable, $140,000.

7. Prior to the receipt of the bond proceeds, St. Louis needed funds and went to Southern Style Bank to borrow $600,000 in bond anticipation notes (BANs), at 5 percent, which were to be paid back using the proceeds of the $2,500,000 bond issue. The entry at the government-wide level to record the receipt of the bond anticipation notes would include a:

A. Credit to Other Financing Sources—proceeds of BANs, $600,000.

B. Debit to Cash, $1,900,000.

C. Credit to Bonds Payable, $600,000.

D. Debit to Cash, $600,000.

8. Assume the bond issue commences, and the $2,500,000 proceeds are received. St. Louis repays the bond anticipation notes in full along with $7,500 in interest. The entry recorded in the Capital Projects Fund to repay the bond anticipation notes would include a:

A. Debit to Other Financing Uses—Retirement of BANs, $600,000.

B. Credit to Cash, $600,000.

C. Debit to Bond Anticipation Notes Payable, $600,000.

D. Debit to Expenses—Interest on Long-term Debt, $7,500.

Part 3:

9. Assume that at the conclusion of the construction project that the total costs totaled $3,200,000. This included some cost overruns. Assuming the high school passes all inspections and the asset is placed into service, the re-class entry to record the Building in the Capital Projects Fund would include:

A. Credit to Buildings, $3,200,000.

B. Debit to Buildings, $3,200,000.

C. No entry would be recorded in the Capital Projects Fund.

D. Credit to Encumbrances—2019, $3,200,000

10. In the Capital Projects Fund, which of the following accounts would be part of the closing entry at the end of the project?

A. Cash.

B. Other Financing Sources—Proceeds of Bonds.

C. Expenses—Interest on Long-term Debt.

D. Construction Work in Progress

Will Thumbs Up Immediately If Answered,

Bryan followed in his father’s footsteps and entered into the carpet business. He owns and operates I Do Carpet (IDC). Bryan prefers to install carpet only, but in order to earn additional revenue, he also cleans carpets and sells carpet cleaning supplies. Compute his taxable income for the current year considering the following items:

a) IDC contracted with a homebuilder in December of last year to install carpet in 10 new homes being built. The contract price of $80,000 includes $50,000 for materials (carpet). The remaining $30,000 is for IDC’s service of installing the carpet. The contract also stated that all money was to be paid up front. The homebuilder paid IDC in full on December 28 of last year. The contract required IDC to complete the work by January 31 of this year. Bryan purchased the necessary carpet on January 2 and began working on the first home January 4. He completed the last home on January 27 of this year.

b) IDC entered into several other contracts this year and completed the work before year-end. The work cost $130,000 in materials and IDC elects to immediately deduct his supplies. Bryan billed out $240,000 but only collected $220,000 by year-end. Of the $20,000 still owed to him, Bryan wrote off $3,000 he didn’t expect to collect as a bad debt from a customer experiencing extreme financial difficulties.

c) IDC entered into a three-year contract to clean the carpets of an office building. The contract specified that IDC would clean the carpets monthly from July 1 of this year through June 30 three years hence. IDC received payment in full of $8,640 ($240 a month for 36 months) on June 30 of this year.

d) IDC sold 100 bottles of carpet stain remover this year for $5 per bottle (it collected $500). IDC sold 40 bottles on June 1 and 60 bottles on November 2. IDC had the following carpet cleaning supplies on hand for this year, and IDC has elected to use the LIFO method of accounting for inventory under a perpetual inventory system: Purchase Date Bottles Total Cost November last year 40 $120 February this year 35 $112 July this year 25 $85 August this year 40 $140 Totals 140 $457

e) On August 1 of this year, IDC needed more room for storage and paid $900 to rent a garage for 12 months.

f) On November 30 of this year, Bryan decided it was time to get his logo on the sides of his work van. IDC hired We Paint Anything, Inc. (WPA), to do the job. It paid $500 down and agreed to pay the remaining $1,500 upon completion of the job. WPA indicated it wouldn’t be able to begin the job until January 15 of next year, but the job would only take one week to complete. Due to circumstances beyond its control, WPA wasn’t able to complete the job until April 1of next year, at which time IDC paid the remaining $1,500.

g) In December, Bryan’s son, Aiden, helped him finish some carpeting jobs. IDC owed Aiden $600 (reasonable) compensation for his work. However, Aiden did not receive the payment until January of next year.

h) IDC also paid $1,000 for interest on a short-term bank loan relating to the period from November 1 of this year through March 31 of next year.

The stockholders’ equity of TVX Company at the beginning of the day on February 5 follows: Common stock—$5 par value, 150,000 shares authorized, 59,000 shares issued and outstanding $ 295,000 Paid-in capital in excess of par value, common stock 525,000 Retained earnings 675,000 Total stockholders’ equity $ 1,495,000 On February 5, the directors declare a 16% stock dividend distributable on February 28 to the February 15 stockholders of record. The stock’s market value is $46 per share on February 5 before the stock dividend. The stock’s market value is $40 per share on February 28.

One stockholder owned 700 shares on February 5 before the dividend. Compute the book value per share and total book value of this stockholder’s shares immediately before and after the stock dividend of February 5.

Compute the total market value of the investor’s shares in part 2 as of February 5 and February 28.